Net asset value
Net asset value is the value of an entity's assets minus the value of its liabilities, often in relation to open-end or mutual funds, since shares of such funds registered with the U.S. Securities and Exchange Commission are redeemed at their net asset value. It is also a key figure with regard to hedge funds and venture capital funds when calculating the value of the underlying investments in these funds by investors. This may also be the same as the book value or the equity value of a business. Net asset value may represent the value of the total equity, or it may be divided by the number of shares outstanding held by investors, thereby representing the net asset value per share.
Generally
Net asset value and other accounting and recordkeeping activities are the result of the process of fund accounting. Fund accounting systems are sophisticated computerized systems used to account for investor capital flows in and out of a fund, purchases and sales of investments, and related investment income, gains, losses and operating expenses of the fund. The fund's investments and other assets are valued regularly; daily, weekly, or monthly, depending on the fund and associated regulatory or sponsor requirements. There is no universal method or basis of valuing assets and liabilities for the purposes of calculating the net asset value used throughout the world, and the criteria used for the valuation will depend upon the circumstances, the purposes of the valuation, and any regulatory and/or accounting principles that may apply. For example, for U.S.-registered open-ended funds, investments are commonly valued each day the New York Stock Exchange is open, using closing prices, typically 4:00 p.m. Eastern Time. For U.S.-registered money market funds, investments are often carried or valued at "amortized cost" as opposed to market value for expedience and other purposes, provided various requirements are continually met.At the completion of the valuation process and once all other appropriate accounting entries are posted, the accounting books are "closed", enabling a variety of information to be calculated and produced including the net asset value per share.
Open-ended funds
Net asset value is commonly used in the context of open-end funds. Shares and interests in such funds are not traded between investors, but are issued by the fund to each new investor and redeemed by the fund when an investor withdraws. A fund will issue and redeem shares and interests at a price calculated by reference to the NAV of the fund, with the intention that new investors receive a fair proportion of the fund and redeeming investors receive a fair proportion of the fund's value in cash.For example, if a fund has a NAV of $200 million and 1 million shares in issue on a certain day, the "NAV per share"—the price at which shares are issued—is $200. A person investing $40 million on that day will therefore be given 200,000 shares. Immediately following his investment the total NAV of the fund will be $240 million, as the new investor's cash becomes part of the fund and is available for investment by the fund. The investor will then be entitled to 1/6 of whatever the fund's value is when he withdraws his investment, if in the meantime his 1/6 ownership is not altered by any further withdrawals or investments to the fund.
The valuation of the assets and liabilities of an open-ended fund is therefore very important to investors. If the NAV in the above example had, with the same assets, been calculated as $160 million, the investor would have been given 250,000 shares and would become entitled to 1/5 of the fund's value.
In contrast, closed-end funds are traded in the open market between investors and so the price of shares or interests in a closed-end fund will be whatever the parties agree it to be, which may not correspond to the fund's NAV. Publicly traded shares in such funds generally trade at a price below NAV.
Inaccuracies and risks
set their net asset value based on daily pricing using the end of the day price, which can introduce inaccuracies. ETFs do not have this precise risk as the holdings are typically reported transparently, although large bid-ask spreads and premiums or discounts to NAV can occur.Mismarking the value of underlying securities can be a fraudulent activity which inflates returns and sets future investors up for losses.
Valuation of assets in open-ended funds and hedge funds
The NAV of a collective investment scheme is calculated by reference to the total value of the fund's portfolio less its accrued liabilities.Calculation of the net asset value for a hedge fund, including the calculation of the fund's income and expense accruals and the pricing of securities at current market value, is a core fund administrator task, because it is the price at which investors buy and sell shares in the fund. The accurate and timely calculation of NAV by the administrator is vital.
In 2003, investors in Lancer Group sued hedge fund administrator Citco for allegedly knowingly disseminating "misleading" Net Asset Value statements. Citco ultimately informed investors that it was resigning as administrator to Lancer's funds, but did not provide an explanation. While Citco pointed to the fact that it had sought statements from Lancer's board of directors as to the propriety of the valuations, Southern District of NY Judge Shira Scheindlin wrote: "Although these actions demonstrate Citco Group's questioning of the numbers, they could also be interpreted as Citco Group's efforts to shield its own involvement in the process". Ultimately, Citco settled with investors.
The case of Anwar v. Fairfield Greenwich is the major case relating to fund administrator liability for failure to handle its NAV-related obligations properly. The defendants settled in 2016 by paying the Anwar plaintiffs $235 million. The court held in the case, prior to the settlement, that "it is reasonable to infer from Plaintiffs' allegations that the Administrators were aware that Plaintiffs would—and did—rely on their statements of the Funds' NAVs that were sent to the investors.... Accordingly, the Court finds that Plaintiffs allege a relationship between the investors and the Administrators that gives rise to a duty of care...."
Businesses
Turning to operating companies as opposed to investment companies, in determining whether shares in a public company are a cheap or expensive investment, one tool used by investors is a comparison of the company's current market capitalization with its NAV. The NAV may be below the market price for the following reasons:- Accounting principles and bases of presentation of amounts in financial statements differ worldwide, blurring the comparability of companies in various jurisdictions. Financial statement values are typically recorded based on their local jurisdiction's related principles of accounting, which affect all the remaining points below.
- The current value of a company's assets likely differ from the historical cost reflected in the financial statements used in NAV calculations.
- The NAV describes the company's current asset and liability position. Investors might believe that the company has significant growth prospects, in which case they would be prepared to pay more for the company than its NAV.
- Certain assets, such as goodwill, are not necessarily included on a balance sheet and so will not appear in an NAV calculation.
In contrast to fund valuation, the assets of a company will generally be valued for the purpose of a NAV calculation using the book value, the historical cost, or the amortised cost of the company's assets, or an appropriate combination of the three.